Discount Financing - What is it? by Fred E. Cope, Founder

Discount Financing is a method of selling and financing a sale that ordinarily would be turned down by a bank or other traditional financing source, unless the dealer has a strong financial statement and would guarantee the contract.

I have been in the finance business since 1962 and I have seen discount financing grow into an important source for new or used car dealers to use. There are many programs that a dealer can consider that will fit in with their method of selling.

My original concept of discount financing was, and still is to a large extent, the idea of paying the dealer his cost of merchandise and also a little profit, and then both of us betting that the customer will pay. The finance company earns only if the customer does pay and then only a portion of each payment collected. The dealer receives the cost of the merchandise and an opportunity for additional profit if the customer pays. It is a 'win-win' situation for the dealer, who always recovers his cost plus a bit more, and an opportunity for the finance source to make money too.

Many programs are offered today by different sources of discount financing. Each program has merit, but with the good points there are also pitfalls. What would be good for one car dealer could be unworkable for another. Of course, every finance source always says they have the best. But, always remember, there are only so many dollars in a contract to divide, the unpaid balance and the finance charges. The following are some of the variables that must be considered when buying or selling paper.

1. The amount of the Cash advance paid to you, the automobile dealer.
2. The amount held in a loss reserve to protect the finance source from losses.
3. When and if the dealer is going to participate in the loss reserve, if it isn't used by the finance source for losses.
4. How often is the loss reserve adjusted back to the dealer.
5. Is the dealer responsible for full recourse?
6. Is the dealer responsible for partial recourse?
7. Is the dealer or the finance source responsible to do the repossessing and send out the notices of sale?
8. The amount of discount in addition to the finance charge the finance source is taking.
9. Is the finance source reporting monthly to the local and national credit bureaus that the account is good or bad?
10. How is the buy back amount calculated by the finance source when the dealer is asked to repurchase a contract that did not pay?
11. Does the finance source earn on the account when the dealer is protecting the finance source from a loss? For instance, does the finance source earn on the account or does it give back all of the finance charges on a buy back?
12. If the account goes bad during the term, how does the finance source rebate to the account prior to charging it to the reserve, buy using the Rule of 78's, actuarial, or straight line?
13. How are the accounts handled after they have been charged to the loss reserve?
14. Does the finance source continue to work the account?
15. Does the finance source return the contract to the dealer?
16. Does the finance source assign the account to a collection agency and put the recovery money back in the dealer's reserve?
17. Does the financing source have internet access to allow a dealer access to see the current status of his accounts?
18. How often is the status of the loss reserve provided showing all of the credits, debits and current balances?
19. Does the financing source load the contract with insurance and then expect the dealer to pay for it when the customer does not pay?

There are a great many finance companies out there anxious to buy your contracts. Just because one may pay a few more percentage points up front does not mean that it is the best deal for the dealer in the long run. Take the time to shop around, see what is available in financing sources, see which market of paper each financing source is looking for and which one should serve you, the independent automobile dealer and your customers best.

The dealer must first target which market of customer will come onto the lot and the type of cars the dealer is going to sell. The type of financing must be matched with the type of cars and customers that the dealer can and wants to sell, and the area the lot is in.

Just like the dealers targeting markets, so do discount finance companies target markets. Dealers should look for a financing source that services the type of sales they are marketing. No one finance company should be the only outlet for a dealer's paper. I know every dealer has heard the quote, \"The cash advance is commensurate with the risk and the higher the risk the higher the discount\". Knowing how risky your paper is helps you select the proper finance source for your contracts and proper programs to allow both you and the finance source to make money. Since 1962, Western Funding Inc. has only dealt in discount contracts on the sub-standard credit risks. We have never purchased contracts on preferred credit customers unless it was by coincidence. So we feel we have the ability and experience to provide a program that will work for the dealer. Often a dealer does not take the time to get all of the facts. My advice to you is to get all of the facts first to see what discount program is really best for you.

There is one other area that discount financing is of service to you, and that is buying your seasoned accounts receivables. Western Funding is active in this area also. The dealer should get all of the facts about the finance source before making a decision to sell, and all of the questions I have outlined previously should be asked. It is in this area that Western Funding encounters the most problems when trying to buy the contracts. So often a dealer has made a sale and taken a note or contract from the purchaser. The purchaser is paying well and now the dealer needs money and wants to sell his receivables. They ask why you can't buy the receivables when the customers are paying well. The answer is the receivables are not legal negotiable instruments.

Here are some of the problems we run up against every day when we try to buy seasoned contracts from a 'buy here-pay here' dealer. We cannot ignore them because we are professionals, and we know what the law is and cannot claim ignorance.

1. The contract used by the dealer does not comply with the current laws of the state.
2. No contract at all, just an open note.
3. No contract or purchase order which is not a negotiable instrument.
4. No credit application.
5. No APR or Federal Disclosure Box on the contract.
6. Ledger card with add ons and no documentation.
7. No copy of the Buyers Guide.

The dealer works hard to make a sale and then loses interest in crossing the 'T's and dotting the 'I's. The dealers must remember that incomplete paperwork will cost him in the long run. Paperwork is important and staying in touch with current laws is important. That is why we are here today and a member of NIADA.